The Brazilian government is hoping that lower taxes on the country's sugarcane ethanol and petrochemical industries will help boost the competitiveness of exports.

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By GERALD JEFFRIS and PAULO WINTERSTEIN

BRASILIA -- Brazil will lower taxes on the country's
sugarcane and petrochemical industries as the government seeks
to boost the competitiveness of its exports as the US expands
shale gas production, undercutting global prices, Finance
Minister Guido Mantega said Tuesday.

Brazil will "neutralize" the so-called PIS/Cofins social
security tax on ethanol producers and petrochemical companies, Mr. Mantega
said Tuesday.

By providing tax credits to ethanol producers equal to the
PIS/Cofins tax burden, which is about 12 centavos ($0.06) per
liter, and providing BRL4 billion in cheaper financing, the
government hopes to spur more investment in the sugarcane
industry. The tax measures will lower federal tax collection by
about BRL970 million this year and about BRL1.2 billion in the
following years, Mr. Mantega said.

The government will also increase the ethanol content in
gasoline, to 25% from 20% currently, he said.

A similar tax break for petrochemical companies will
increase the credit that companies currently receive by about
4.5 percentage points, more than doubling the tax credit they
currently receive, he said. The increased tax credit, which
should reduce tax collections by BRL670 million a year, will be
in effect through the end of 2015, and gradually climb back to
normal levels starting in 2016.

"We have a constituted threat from the production of shale
gas in the US cheapening the cost of raw materials, greatly
increasing the competitiveness of the American petrochemical
industry," Mr. Mantega said. With these measures "we are
reducing taxes on the main supply chains of the petrochemical industry so as to
reduce the prices of products."

Mr. Mantega said that the tax credit for the ethanol industry isn't primarily
meant to lower prices at the pump, but spur more
investment.

"The main objective is to make conditions favorable for more
investment in the industry. Producers won't necessarily pass on
savings to the price, but they will have bigger margins that
allow them to boost output," he said.

The increased ethanol content in gasoline should pull down
prices, however, and eventually the increased production of
ethanol should also bring down prices at the pump, Mr. Mantega
told reporters. Brazil's government has been struggling to
contain inflation and rising prices forced the central bank to
raise the benchmark Selic interest rate last week, reversing a
cycle of cuts that last year brought the Selic to a record low
of 7.25%.

According to Elizabeth Farina, president of Brazil sugarcane
association Unica, Brazil will have excess capacity to process
ethanol only for the next two growing seasons, and so new
investment is needed to increase output.

"This helps the competitiveness of Brazilian ethanol,
although [these measures] alone won't solve the problems in the
industry," Ms. Farina said, noting that several processors are
expected to shut down this year as difficulties mount.

Brazil, at one point the world's biggest exporter of
ethanol, has faced headwinds in recent years as sugar prices
jumped -- leading many sugarcane processors to switch over to
producing more of the sweetener and less of the fuel -- at the
same time that bad harvests squeezed supplies and demand rose
as the UScut a tax on ethanol shipped from Brazil.

According to Unica, Brazil imported 301 million liters of ethanol in the harvest year ended in
March, almost all of it coming from the US, while exporting
2.29 billion liters to the North American country. That
favorable balance is in stark contrast to the previous harvest
year, when Brazil imported 1.45 billion liters, while exporting
just 663 million liters to the US.

Dow Jones Newswires

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